Market sentiment and mutual fund trading strategies

Based on a sample of the US equity funds, this paper investigates the performance of both follow-the-leader (momentum) and follow-the-loser (contrarian) trading strategies. We find that similar fund styles tend to be the biggest winners and the biggest losers, and that the follow-the-leader strategy outperforms the follow-the-loser strategy. However, the follow-the-loser strategy beats both the market and the follow-the-leader strategy in major down markets. Using a piecewise linear regression, we also document a relationship between the market and our two trading strategies. Our study suggests that behavioral factors play an important role for funds with extreme performance.